Oil pump jacks are seen next to a strawberry field in Oxnard, California February 24, 2015. REUTERS/Lucy Nicholson

U.S. approves landmark crude oil export swaps with Mexico

August 14, 2015

Timothy Gardner | Reuters

WASHINGTON – The Obama administration will allow limited sales of U.S. crude to Mexico for the first time, a senior administration official told Reuters, marking another milestone in loosening a contentious ban on exporting domestic oil.

The Commerce Department is “acting favorably on a number of applications” to export U.S. crude in exchange for imported Mexican oil, the official said. Such oil swaps are one of several possible exemptions allowed in the four-decade-old law that otherwise bans most overseas shipments.

The approvals come eight months after Mexico formally sought permission for a swap, a historic step for a nation where oil self-sufficiency has long been a source of pride. The shipments, likely to be lighter, high-quality shale oil, will help Mexico’s aging refineries produce more premium fuels. U.S. refiners will continue to get Mexican heavy oil, a better match for them than the deluge of light oil coming from Texas and North Dakota.

The licenses, good for one year, will be formally issued by the end of August, the official said. He declined to offer further details on volumes, saying only that the number of approvals was “a handful.”

Mexico’s state oil company Pemex said in January it was seeking an exchange of about 100,000 barrels per day, equivalent to only about 1 percent of current U.S. output.

The department also denied several applications for swaps with other countries in Asia and Europe, which are not afforded the same special consideration as Canada and Mexico in the 1975 energy law, the official, who declined to be named, said.

Although limited in scope, the move toward freeing up trade will please U.S. oil producers such as Pioneer Natural Resources and ConocoPhillips, which say the restrictions force them to sell oil at below global market rates as shale oil boom created a glut of light crude.

It may also add momentum to efforts mostly by Republicans to repeal what they see as a relic of the 1970s Arab oil embargo era and fears of energy insecurity.

Repealing the overall ban would be a blow for refiners such as PBF Energy Inc., which have benefited from a sudden abundance of discounted domestic shale oil that their foreign rivals cannot buy.

President Barack Obama has the power to crack the door wider to oil exports, such as simply allowing exports to Mexico without the need for exchanges, or including shipments in upcoming regional trade deals.

But he faces pressure from fellow Democrats and many environmentalists to move slowly. Critics say a full repeal could raise U.S. gasoline prices, although a slew of research studies suggest liberalizing trade would more likely lower the costs for U.S. consumers.

Environmentalists say crude exports would encourage more oil production and boost carbon emissions they seek to curb.

STEADY STEPS

The export ban includes a few exceptions, such as allowing oil exports from Alaska. Exports of refined fuels, such as gasoline or diesel, are also allowed. In addition, the Commerce Department has approved crude oil exchanges with Canada, which has also enjoyed unfettered trade for years. Apart from a limited exchange of oil for the U.S. strategic reserve in the late 1990s, Mexico has not had access to U.S. oil.

The Commerce Department last year took several steps, within the existing rules, to ease overseas sales: first giving companies clearance to export some forms of super-light crude; and then issuing guidelines on what can be sold without a special permit.

Pemex and U.S. oil producers want the administration to grant Mexico the same status as enjoyed by Canada.

However, the one-year licenses for swaps with Mexico can be renewed or revoked, the official said, and all the oil covered by the exchanges must be refined at its destination, either in Mexico or the United States.

Companies involved in the trade with Mexico will also have to show that the same volumes of oil are being sold and bought.

“These are exchanges, so if a barrel goes out then a barrel goes in.”

The new opening may prove cold comfort for U.S. shale oil producers squeezed by a dive in U.S. crude prices to six-year lows near $40 a barrel. Because Mexico does not routinely import crude, it is hard to tell how much more it might pay for U.S. oil than Gulf Coast refiners.

Pemex, whose own production slipped last year to a record low, has been eager to tap into the U.S. shale boom, building on landmark 2013 energy reform that ended its 75-year monopoly on production and exploration of oil and gas.

(Reporting by Timothy Gardner; Editing by Tomasz Janowski)

Copyright (2015) Thomson Reuters.

This article was from Reuters and was legally licensed through the NewsCred publisher network.

7 comments

The Mexican heavy crude is better, has a much lower pet coke content than the Canadian tar crude– and it is a trade US light for Mexican heavy
Canada exports oil to the US- and does not import oil from the US–

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